Good outlook, but…

That’s how the latest issue of the World Bank’s Bangladesh Economic Update reads. The 16 page document is a pretty good report — I highly recommend it to anyone interested. I am going to highlight: the economic conditions and outlook; the costs of recently agreed privately generated power; and the commentary on reforms.

The report also covers inflation, but I’ll explore that in a separate post.

Conditions and outlook

The Bank says the economy grew by 5.8% in 2009-10, in between the government’s 6% claimed at Budget and the BBS’s first estimate of 5.5%. “Given the slow global recovery, severe power shortages, and labor unrest in the garments sector, this growth performance is noteworthy,” says Sanjay Kathuria, the Bank’s lead economist for Bangladesh. I agree.

For 2010-11, the Bank forecasts growth of 6.1-6.3%, compared with the IMF’s 6%, ADB’s 6.3% and the Budget forecast of 6.7%. That is, the international agencies are not as sanguine as the government, but the overall economic outlook is definitely a good one.

The Bank’s forecast is largely on the back of higher public and private investment. Investment is expected to grow by 8.5-9.1% in 2010-11, compared with -0.7% in 2008-09, 6.2% in 2009-10, and 8.1% in 2010-11. Exports are also expected to recover — 8.5-10% growth are expected this year, compared with 7% (2007-08), 0% (2008-09) and 5% (2009-10).

These are welcome prospects, though the report also list downside risks: weak global recovery could dampen exports and further slow down remittances; and domestic- energy shortages pose the biggest threat to an increase in growth rates.

Costs of recently agreed privately generated power

Given the electricity shortage, the government’s rental power plants policy might seem an appropriate short term measure. But these plants are pretty costly. The report actually provide some numbers.

The government (PDB) sells each kWh of power to the consumers at 2.68 taka. Each kWh will be bought from the new suppliers at 8-14 taka. The difference between the price government receives from the consumer and the one it pays to the producer will obviously have to be filled by the taxpayer. The Bank estimates that this could be between 32 billion and 72 billion taka in 2010-11. There is more. These new plants use diesel and furnace oil, and BPC will probably subidise the producers. This could cost between 5 and 13 billion taka. And the more electricity is produced, the larger the bill is.

To put these numbers in context, Bangladesh’s GDP is about 7300 billion taka. That is, the Bank estimates that the fiscal cost of these recent agreements could be about 1% of GDP.

Two questions need to be answered.

First, can we afford it? In 2010-11, the Banka assesses that Bangladesh has the fiscal space needed, barring there is no unforeseen shock (such as natural disasters or food price hikes).

Second, are we getting a good deal? A simple way of thinking whether it’s worth getting the electricity at these prices is to look at the acceleration in economic growth that this extra power is likely to generate. If 1% of GDP fiscal cost accelerates growth by more than 1 percentage point (ie growth goes from last year’s 5.8% to something faster than 6.8% next year) then this is a good deal. If growth remains at 6.1-6.3% range, then we are probably not getting much value for money from these electricity deals.

Commentary on reforms

And the above quantitative analysis says nothing about recent legal changes. The recently passed Speedy Supply of Power and Energy (Special Provision) Act 2010 provides blanket immuniy to stakeholders in the power and energy sector ‘acting in good faith’. The law will remain effective for two years. The risks to public interest that this act poses is mind boggling, and it is a sad, sad indictment of Bangladesh’s public discourse that hardly anyone has talked about it.

This isn’t the only retrograde step taken by the government recently. The Anti-Corruption Commission was severely misused by the 1/11 military regime. But instead of enhancing the Commission’s independence from such misuse, the cabinet has decided to curtail its powers significantly.

Possibly of bigger consequence to investment, the Telecommunications Act was amended such that the telecom operators or ICT companies can’t file appeals against any action by the government or the telecoms regulator.

The government has also abolished the Better Business Forum, and shelved recommendations of the Regulatory Reforms Commission.

Against these setbacks, the government has improved institutional frameworks for investment through Special Economic Zones Act, Public-Private Partnership guidelines and Bangladesh Infrastructure Finance Fund.

Whether the effects of these retrograde steps or the reforms dominate will determine whether Bangladesh can break through to 7% plus growth in this decade.